There is no mortgage interest relief restriction for limited companies
The amount of tax relief accessible to individual property owners is being cut back, any interest paid on a mortgage to purchase property through a limited company is fully tax deductible. It can often work out more tax efficient to purchase an investment property through a limited company.
Since April 2020, landlords have not been able to deduct mortgage interest from their rental profits, which will affect their income tax bills significantly. It is worth considering setting up a limited company and follow this route.
Limited companies have a significantly lower tax rate than individuals who pay income tax
A limited company pays corporation tax rather income tax, corporation tax is at 19% where as income tax can be as high as 45% for high earners. Since April 2020, corporation tax is set up as 17% of the company profits. There are a lot of reasons to go with a limited company option.
Obviously, you will have to pay income tax when accessing the funds from your limited company – but it is very likely that you will be better off from a tax-efficiency point of view doing this than having to pay high levels of income tax, such as 45%.
Sharing company profits between multiple shareholders, whether by way of salary or dividends, this means you can take advantage of using multiple individual tax allowances e.g. you and your spouse, or your children (if they are over the age of 16). You can each use as much of your income tax allowance as you want, and you don’t have to take the same amount of profit as each other, and you can vary the frequency of sharing out the profits, too.
It is very simple process to onboard new shareholders as well to a company structure, therefore allowing the profits to be distributed amongst more people if you so wish.
You can rely on the fact that creditors do not have access to your personal assets
Particularly useful when buying land and then developing property, relying on limited liability protection rather than personal liability can be protecting.
Creditors only have access to the company’s assets, so if the company’s financial situation was to deteriorate, the people behind the company i.e. directors and shareholders will be safe from creditors. Be aware, though, that if you are a first-time landlord, your lender may insist that you put a personal guarantee behind a mortgage, which can mean that creditors can access personal assets if the company’s financial situation were to deteriorate. Landlords with a good track record can often escape being asked to provide a personal guarantee.
You can retain the company profits and reinvest them without paying more tax
When you own a property in your personal name, you need to pay tax on any profit you receive from that property, even if you are intending on using the profits to reinvest in more property. With a limited company, all of your profits (after corporation tax, which, as mentioned before, is lower than income tax) can be kept in the company and used to reinvest, if that’s the route you want to go down.
Low stamp duty when selling shares of a company containing properties
When a company owns a property and decides to sell the property, there is an option to sell shares of the property rather than the property itself. This can be advantageous to the buyer, as they only have to pay 0.5% stamp duty on such a transaction. Stamp duty for personally owned properties can be as high as 15%.
Access to better loans when looking to grow the business
When growing your property portfolio, you can use this to your advantage when approaching lenders for loans. By showing that you have a strong portfolio of investment properties and a well-managed limited company behind it, creditors are more likely to offer good rates when applying for loans.
By using one limited company for all your properties, you will have the ability to see the performance of your entire investment portfolio to enable you to work out which properties are making and losing money, which can, in turn, be provided to investors or creditors to help support any requests for financial backing.
We inform our landlords on property industry updates with blogs on Residential Property Management London. There are many updates that a landlords must keep up with whether it is tax, fire regulations, health and safety regulations, changes in the rental market or how best to keep the property maintained on time within budget.
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